The G7 Belt and Road Non-Initiative

• 21-Jun-21
• admin

If you watch financial news these days, you will learn new vocabulary.   “Hawkish”, “taper”, “dot plot”…these words are peppered throughout the media for the past few weeks. 

 

Wonder what they mean?  

 

They all have something to do with US monetary policy. 

 

“Hawks” vs “Doves” are not really new, as US monetary policy have long been described in those avian terms.   “Hawkish” means a tough stance on inflation, and “dovish” is a benign attitude towards the problem.  By extension, hawkish policies will tend to lead to higher interest rates and dovish means the monetary authorities will likely not do anything to put upward pressure on the cost of money.  

 

Taper is a rather new word used nowadays to describe what the US Federal Reserve will do to sharpen its focus on zero interest rates and massive bond purchases.   The current policy is regarded by investors as indiscriminately beneficial to all and sundry, and tapering will involve more incisive choices as to who gets to benefit from Fed largesse.   As such, tapering refers to that feared step before interest rates rise.

 

Dot plot is the really new kid on the block or at least, the new kid shown to the public.   This used to be an internal tool - a diagram which shows how members of the Federal Reserve Open Market Committee (with 18 members in all) internally vote or indicate where each one of them thinks interest rates should be in the future.    A recent dot plot shows that the planning horizon goes out to about 2023 to indicate where they set interest rate targets.

 

The dot plot released on Wed shows that instead of no increases in interest rates before the end of 2023, as was previously indicated, it is now more likely (nothing is confirmed) that the strong economic recovery will enable the Fed to raise interest rates a couple of times (usually ¼ percent each time) towards the end of 2023.    13 out of 18 officials see at least one rate hike in 2023, as compared with zero previously.  

Well, it is not really a big change.   An interest rate hike is still 18  months away, and it is at worst a half percent increase.   Who cares, if the investment horizon is the next six months?   I humbly think this is as usual Fed-speak, because market participants have been hammering the Fed for not dealing with the two data points on core inflation, which went up from 2 percent to 4.2 percent in April and then 5 percent in May.  The Fed needs to show that they are responsive, instead of just claiming it’s all “transitory” (Fed speak for no problem), by bringing forward the time frame to “think about thinking of” interest rate increases from beyond the end of 2023 to the end of 2023.  Thank you.  Let’s get back to investing without worries.

 

Nevertheless, US Ten Year Treasury yields jumped by about 10 basis points (1/10 of 1 percent) on the news.   US Dollar currency rates followed suit and most dollar rates were higher by about 50-100 pips.   The Yen dropped below 110, and is now on the way to 111, a level we have not seen in about a year.

 

Metals, including Gold and Silver, dropped sharply in reaction to the news and the Dollar gains.  Gold is back at near $1800 after testing resistance at $1900.  Still more than 10 percent below its peak last August.

  

Well, that was the excitement of day…not much to write home about, really.

 

The more interesting news to watch this week is what came out of the G7 meeting.   This was the haphazard agreement to counter China by offering green infrastructure to the 140 countries that are already benefitting from China’s Belt and Road Initiative that started in 2013.

 

This is a joke, right?

 

I think so.   Why?

 

First of all, the G7 countries are still in the shadow of their imperialist past.   Why didn’t they think of helping these 140 countries that have already signed MOUs with China to jointly develop infrastructure before China did?   Well, imperialists don’t build infrastructure…they just rob and ravage.

 

The narrative that is emerging from the G7 is that they think China is trying to entice these developing countries into “debt traps” so that eventually China will take over the equity portion in these projects.   They cite the example of the Hambanthota Port in Sri Lanka which has basically allowed China to take over 80 percent of the equity, hence controlling a chokepoint over the entire South Indian Ocean.

 

Whether China has such intention is moot, but when the imperialists think in such terms, the narrative from the G7 becomes just that.   They imagine an imperialist power in China is doing what they used to do.

 

The pertinent question is if infrastructure can help the rest of the world, then why wait till 140 countries are in collaboration with China after 8 long years to start only now?   Obviously the G7 did not really think the developing world needed infrastructure until China forced them to compete for attention.  They also probably thought China was incapable of making so much real progress in such a short time.   If G7 does not act now, they will soon find the entire developing world from the western borders of China to the Cape of Good Hope will be carrying traffic on Chinese built road and rail, with the oceans in between filled with vessels docking at Chinese-built ports, all running on Chinese built hydropower or clean energy plants.   That suddenly becomes scary to people who used to think they run the world.

 

If China is accused of using the BRI to use up excess cement and steel that its own economy does not need, then that accusation is probably justified.   But for China to be accused of using money to cultivate client states is not borne out by the track record of Chinese foreign policy since the beginning of the Ming Dynasty, from 500 years ago.   It is not in the Chinese psyche to colonise, or evangelise its methods of governance, unlike in the West over the same time frame in history.   And in the 21st century, Beijing has still a lot more to do at home, improving the lives of its 1.4 billion population, than to go out and colonise another billion or two more.   Colonisation and running the affairs of more people is really asking for trouble.

 

The Chinese are not that stupid.

 

Putting intentions aside, let’s examine if it is even possible for the G7, which was short on details in the recent announcements, to be able to do what the Chinese have been doing over the last 8 years in the BRI.  

 

To create infrastructure for other countries, you have to be good at it.  In your own country, if you screw up, nobody knows or cares.   Not if you are doing it for somebody else.  The G7 used to be very good at infrastructure, during the 19th and 20th centuries.   But now?   In America, the infrastructure there is 50 years behind China’s - for example, it took two years longer to repair a pedestrian bridge in rustic Cambridge, Massachusetts (home of MIT and Harvard) than for Beijing to build a bridge over a major road intersection which was completed in something like 48 hours (1 weekend).   Look at the 1000 bed hospital in Wuhan at the beginning of the Covid crisis.   The Western media does not talk about this at all nowadays, but that was a 1000 bed hospital built in 10 days, from scratch.   Who in the G7 can do this?  

 

In the smaller G7 countries, there is no space to build out massive projects that have been the hallmark of China’s infrastructure sector in the last 20 years.  These folks have no experience.   And the US has neglected infrastructure for a good 50  years – hence the Americans also have no experience.   Without that experience, how can they go out to build big things, in the vast and remote expanses of Central Asia and Africa, to compete with what the Chinese have done and can continue to do?

 

The sea-crossing bridges, the ultra-modern subways (compare the spanking new metro systems in any number of Chinese cities with the decrepit crap you find in G7 cities other than Japan), the super fast rail system (even France’s TGV and Japan’s Shinkansen are nowhere fast enough than the continental network now existing in China), e-cars (Tesla is more a brand than a serious car maker), the dams, the airports and ports, are all created at a cost level and speed that cannot be achieved by the G7 countries.   Even if all intentions are noble, the Chinese effort in the BRI cannot be replicated easily by the G7.

 

Then there is the problem of resources.   It is not just about the money.   First let’s see how much money the G7 will put up to fund this declared exercise.  It’s easy to talk but in the politically fractious societies of the West, which politician can successfully lead the charge to pledging multiple TRILLIONS (which China is actually already spending) to developing infrastructure in places without voters?   As they say, talk is easy; putting money where the mouth is will be an insurmountable task in the modern democratic systems of the G7.   Can anyone see such a bill for funding foreign infrastructure in the trillions of dollars getting past Congress in the US?  I certainly don’t.  Even domestic infrastructure is struggling in this process.

 

Besides the money, there are three other critical resources that are needed in infrastructure.   Cement, steel and a large, skilled labour force.   China is the world’s largest producer of cement and steel in the world, by far, and nobody else is close to having that much of these resources to put into such ambitions.   China’s crude steel output reached a record high of 1.07 billion metric tonnes in 2020, more than all the other countries combined.   US production is less than 1/10 of that – about 88 million tonnes. 

 

In cement, China produces 2.2 billion metric tonnes in 2020, leading all other countries by a large margin.   By comparison, the US produces 90 million tonnes, about 4 percent of China’s.  The rest of the G7 are insignificant producers of both critical infrastructure inputs.  

  

Of course, one can always buy raw materials on the open global market.   And build the same infrastructure at several times the cost the Chinese do it at.   Which option would the recipient countries choose?   The G7 plan is a non-starter.

 

And you would need skilled labour to put all those inputs into bridges, roads, dams etc... China has the world’s largest and most skilful labour force, experienced in infrastructure of all kinds and able to be deployed to the far corners of the earth, as they have been over the last decade.  

 

So if you ask me, the G7 leaders who gathered in Wales this last week don’t even know what they are talking about.   An alternative Belt and Road Initiative?   It is all just brave words and empty talk.

 

But I hope that I am wrong.   If I am, the whole world will benefit from more choices and eventually better development options.   That’s all good.   But I am not holding my breath for it to happen.    

 

 

Wai Cheong

Investment Committee

The writer has been in financial services for more than forty years. He graduated with First Class Honours in Economics and Statistics, winning a prize in 1976 for being top student for the whole university in his year. He also holds an MBA with Honors from the University of Chicago. He is a Chartered Financial Analyst.